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Is mutual fund optimism the light at the end of the tunnel?

The economic sector of India finally delivered some goodinvestment news, in May the mutual fund industry witnessed maximum net inflow since March 2020 when the pandemic hit us. The economy owing to lockdown, reduced personal disposable income and expenditure has been going downhill since last year. The recent consumer confidence index survey conducted by the RBI also painted a poor picture of the present and future economic prospects.

Rising inflation and no help from the government to cut down rates to infuse capital (MPC’s notification) is propelling pessimism in people. Amid such doom, this news is like a fresh breath of air. Experts have reacted differently to this news, some believe that markets are disassociated from reality and this rise may crash soon. As the country prepares itself for the third wave, some experts believe that this rise owns itself to the latent optimism about present and future, that things will return to normalcy. Let’s have a deeper understanding of this news starting from Mutual Funds.

What are mutual funds?mutual fund

Warren Buffet, one of the richest man in the world says never put all your eggs in one basket, Mutual Funds turn this quote into reality. A mutual fund is a company that gathers money from investors and invests it in a combination of securities such as short-term debt, stock, equities and bonds. This joint security profile is known as a portfolio. People willing to invest buy shares in mutual funds, each share represents investor’s ownership in that fund and the income it generates.

Mutual funds are preferred over other investments because investors don’t have to manage funds, professionals are hired to do the same. Mutual funds are a combination of debt, equity, stocks, bonds et cetera this diversification reduces the risk of loss if a company fails, because the money isn’t invested in only one type of fund or company.

Most portfolios are set at a low amount to coax investors. A mutual fund provides instant liquidity as funds invested can be reclaimed at any time for the current net asset value plus any redemption fees. Redemption fees is paid by an investor to exit from the portfolio. There are four main types of mutual funds money market funds, bonds funds, stock funds and target-date funds.

Each has its own risk and rewards; the higher the risk – the higher the reward. Money market funds are mostly short-term investments with low risk, bond funds have high risk, stock funds are invested in corporate stocks and target-date funds are typically designed for retirement purposes they are also known as life-cycle funds.

Investors earn from mutual funds in the form of dividend payment, distribution of capital gains and increase in net asset value. The performance of a portfolio has no connection with its record. Before investing in mutual funds read prospectus carefully and understand the risks.

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This optimism owes its self to no lockdown policy opted by the central government. States were given the freedom to impose complete or partial lockdowns because of which economic activity did not fully stop. Robust earnings from March kept investors afloat, because of which investments poured in May. A slump in number of Covid cases recorded per day and the recent announcement by the Prime Minister regarding procurement of 75% of the vaccines by centre heightened the enthusiasm of investors.

Significant data has been collected regarding the rise in power consumption, vehicle registration, e-way bill generation, railway freight et cetera that suggest that economy is coming back on track. International investors have also started investing as per NSDL data, Foreign Portfolio Investment (FPI) in May recorded an outflow of capital, in June the FPI net investment stood at Rs 14,078 crore.

Mutual funds are always known to avert peril because of diversification, which is the reason why investments are now spilling into mutual funds. The same idea is shared by Nilesh Shah, MD, Kotak Mahindra AMC. He shared that while optimism is in the air along with good indicators, investments are turning towards mutual funds because of high liquidity and low risk.

He said, “ there have been numerous examples over the last 8-10 months where people withdrew money from MFs when they needed to run their life or meet other family needs the role played by MFs as an investment instrument over the last one year, has only reemphasised its importance within the family, and we are saying not only the existing investors coming back with more investment but also getting their family and friends to do that”.

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AUM or asset under management is the total market value of assets under a mutual fund at a given point in time. It includes returns that the mutual fund earns on its investment as well as money a fund manager has to buy more investments. It is a hodgepodge of portfolio and income. The bigger the AUM the higher the fund trust. Investors poured Rs.10,082 crore into equity-oriented schemes in May. Even after the sell-off by foreign portfolio investors, declines in Covid cases has brought the confidence to invest back.

This confidence bestowed good returns in the last three months to mutual fund investors. Akhil Chaturvedi from Motilal Oswal asset management company says first wave of Covid shows that these waves are for a short period, after some time things start coming back on track. People invest in dips (bear period) because they know that the value of an investment will rise after some time as economic activity increases.

Mutual funds are set at low initial prices to attract investors because of which money was diverted towards MFs. Investors put in 25,000 crore in equity schemes in last three months. Some investors were staying low last year and saved money are now back investing. The announcement by the Prime Minister and fall in daily number of Covid 19 cases have motivated people to invest.

Big question. Are there any risks involved?

Extraordinary circumstances like pandemic – when it will end or when it will come back can never be predicted. So the confidence in market conditions for investment still hangs in balance. Medical experts have predicted the possibility of a third wave and the country has started preparing for it. The monetary policy committee of RBI along with IMF has lowered the predicted growth rate to 9.5%. Inflation is on the rise, it’s right now pegged at 5.1% with poor growth, increasing food and oil prices. Petrol prices as of now in Rajasthan’s  Shri Ganganagar is Rs.106 per litre.

Indian economy has entered a period of stagflation and getting out of it involves extraordinary measures, like printing of currency which has its own consequences. There is a fear that sell-off (outflow of money) by foreign investors can pressuriseliquidity once RBI takes the foot of the pedal that encourages spending (accommodative monetary policy). The RBI has speculated that this increase in the stock market post pandemic is an artificial bubble which may burst soon. It raised same concerns last year when prices of stocks skyrocketed.

It’s a proven fact that whenever value of mid – small caps rise than large caps which is the situation now, market is bound to crash for corrections. The one element that we can control is rise of COVID-19 and a possible third wave, by wearing masks, practicing caution and preparing for a third wave. The sentiment that the rise in stock prices will sustain has more holes than Swiss cheese.

Aishwarya Ingle
Aishwarya Ingle
I am a person who believes in freedom of human mind. A free mind is highly creative and imaginative. Imagination is not a cloth that is to neatly folded in a box, but it is fire. It can light an entire jungle or a single matchstick, it depends upon the free environment.
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